Michael Company accounts for a long-term construction contract using the percentage-ofcompletion method. It is a four-year contract currently in its second year. Recent estimates of total contract costs indicate the contract will be completed at a profit to Michael Company.

Required:

a. What theoretical justification is there for Michael Company’s use of the percentage-of-completion method?

b. How are progress billings accounted for? Include in your discussion the classification of progress billings in the Michael Company financial statements.

c. How is income computed in the second year of the four-year contract using the cost method of determining percentage of completion?

d. What is the effect on earnings in the second year of the four-year contract when using the percentage-ofcompletion method instead of the completed-contract method? Discuss.